Energy Banking with India1 : Path of Least Resistance

Santa Bahadur Pun

Abstract: Once the 456 MW Upper Tamakoshi Hydroelectric Project is commissioned by the end of 2018, Nepal
is expected to have surplus energy during the wet/monsoon season of 2019. Nepal’s Energy Ministry has decided
to resolve this surplus issue through Energy Banking with India whereby Nepal exports her wet season power for
India’s dry season import on “the same volume”. This is an extremely naïve assumption even if it is for the sake
of mere negotiation. Discussing the short-sightedness of Energy Banking concept, this article stresses that Nepal
should have, instead, activated the other two prevailing instruments of power trading, that of bilateral and regional
2014 Indo-Nepal Electric Power Trade, Cross-Border Transmission and Grid Connectivity Agreement and the 2014
SAARC Framework Agreement for Energy Cooperation (Electricity) respectively. Activating these two agreements
would have ‘Open Sesame’-d the doors to Nepal’s growing hydropower capabilities – a win-win situation for both
countries.

Power Trading
T he media2 reported that during Prime Minister KP
Oli’s June 2018 visit to India “Nepal to Propose
Power Swap with India.” With Nepal having surplus
energy during the wet season when the 456 MW Upper
Tamakoshi comes on line by the end of 2018, the Energy
Ministry plans to sell this surplus energy to India
for cash. But as “determining the price of electricity
becomes an issue”, the Ministry is also toying with the
option of Energy Banking. This Energy Banking concept,
according to the Energy Ministry, gives Nepal the
opportunity “to export surplus electricity to India during
the wet season and import back the same volume of
power during the dry season when there is a shortage of
energy [in Nepal].” Noteworthy in this Energy Banking
concept is Nepal’s naive assumption that India will agree
to import Nepal’s wet season energy and export her dry
season energy in “the same volume”. Surprisingly,
Nepal believes the wet and dry season energy to be of
the same value! Later the same media3 reported that
“Nepal Electricity Authority (NEA) submitted a concept
note for energy banking between Nepal and India to the
Indian Embassy” as per its request and “The embassy
will forward the note to the Indian Power Ministry so
that it can be discussed during the Energy Secretary
level Joint Steering Committee (JSC) meeting between
the two countries slated to be held next week in New
Delhi.” Perplexing indeed is why NEA submitted the
Energy Banking note to the Indian Embassy directly
and not through the normal channel of Energy Ministry,
Foreign Ministry and then only to the Indian Embassy!
Any negotiating party keeps its strategy close to its
chest and exposes them only slowly at the negotiating
table. Perhaps, this is one of the reasons why Nepal is
always at the receiving-end of Indo-Nepal talks/MOUs/
agreements!
What Purpose? – The 2014 Indo-Nepal Power
Trade Agreement
Also, perplexing is, why Nepal immediately resorted to
this Energy Banking concept when other instruments
of energy trading are already available between the two
countries. There is, for instance, the bilateral Indo-Nepal
Electric Power Trade, Cross-Border Transmission and
Grid Connectivity Agreement initialed on October 21,
2014. Incorporated in that agreement are the following
two important clauses related to “non-discriminatory
access” to cross-border power trading:
ARTICLE-II
(b) The Parties shall allow non-discriminatory
access to the cross-border interconnection(s)
for all authorized/licensed participants in the common
electricity market.
ARTICLE-IV
(b) The Parties shall allow the authorized/licensed
electricity producers/buyers/traders of each country
to engage in cross-border electricity trading,
including that through Power Exchanges, and to seek
cross-border transmission access as per the laws of the
respective country.
When such “non-discriminatory access” instrument
is available, the Energy Ministry mandarins opted
for the easier short-term Energy Banking mode and
refrained from using the tougher “determining the
price of electricity” long-term power trading access
into Indian market. Nepal Electricity Authority (NEA),
as an authorized/licensed participant, can engage in
non-discriminatory cross-border interconnection(s) in
the common electricity market. This 2014 Indo-Nepal
agreement provided Nepal access to Indian electricity
market. In fact, India is presently enjoying this very
access to Nepalese market to the tune of around 500 MW
during the dry season. India, however, skillfully shielded
her own vast market by issuing the discriminatory
Guidelines4 on Cross Border Trade of Electricity
on December 5, 2016 citing electricity trade involved
“issues of strategic, national and economic
importance”. More perplexing is the Nepalese
mandarins’ naïve assumption that India will concur
to trade the Wet/Dry Season energy on equal volumes
when electricity tariffs5 vary on hour-by-hour, day-by-
day and month-by-month basis.

HYDRO NEPAL | ISSUE NO. 23 | JULY 2018 1

Merely a Decorative Ornament? – The 2014
SAARC Framework Agreement for Energy
Cooperation (Electricity)
The SAARC Framework Agreement for Energy
Cooperation (Electricity) initialed by the eight SAARC
member countries (Afghanistan, Bangladesh, Bhutan,
India, the Maldives, Nepal, Pakistan and Sri Lanka) in
Kathmandu on November 27, 2014 is the other prevailing
instrument to electricity trading with the following
preamble:
Recognizing the importance of electricity in
promoting economic growth and improving the quality
of life. Realizing the common benefits of cross border
electricity exchanges and trade among the
SAARC Member States leading to optimal utilization
of regional electricity generating resources, enhanced
grid security, and electricity trade arising from
diversity in peak demand and seasonal variations;
The SAARC Framework Agreement for Energy
Cooperation (Electricity) stated:
Article 1
Buying and Selling Entities: Buying and Selling
Entities means any authorized public or private power
producer, power utility, trading company, transmission
utility, distribution company, or any other institution
established and registered under the laws of any one
of the Member States having permission of buying
and selling of electricity within and outside the
country in which it is registered.
Article 12
Transmission Access: Member States shall, for
the purpose of cross-border trade, enable non-
discriminatory access to the respective transmission
grids as per the applicable laws, rules, regulations
and applicable inter-governmental bilateral trade
agreements.
Article 13
Facilitating Buying and Selling Entities: Member
States shall enable Buying and Selling Entities
to engage in cross-border electricity trading
subject to the laws and regulations of the concerned
Member States.
This means SAARC Member States are entitled to non-
discriminatory access and can engage in cross-border
electricity trading. Though Nepal is totally India-locked
on the east, west and south, she is separated from
Bangladesh in the south-east by a mere 18 km stretch
of Indian territory appropriately called the chicken-
neck. Bangladesh is keen to invest in the development
of the 1,110 MW Sunkoshi II and 536 MW Sunkoshi
III hydropower projects6 in Nepal. With that objective,
Bangladesh’s Prime Minister Sheikh Hasina, after her
April 7-10, 2017 State Visit to India, had the following
statement incorporated in the April 8, 2017 India-
Bangladesh Joint Statement7 :
28. The two Prime Ministers emphasized the advantages
of sub-regional cooperation in the areas of power,
water resources, trade, transit and connectivity for
mutual benefit. They welcomed the fact that a Trilateral
2 HYDRO NEPAL | ISSUE NO. 23 | JULY 2018
Memorandum of Understanding between Bangladesh,
Bhutan and India for Cooperation in the field of
Hydroelectric Power had been worked out and noted
that it would be signed at an occasion when leaders of
all three countries would be present together. Prime
Minister Hasina requested Prime Minister Modi
for facilitation of cross-border power sector
cooperation with Nepal.
There are two noteworthy elements in this joint
statement on power sector. The first is the ‘Trilateral
Memorandum of Understanding between Bangladesh,
Bhutan and India for Cooperation in the field of
Hydroelectric Power’. Nepal has been conveniently
detached from this sub-regional “Trilateral”
cooperation. Wanting only the Brahmaputra8 riparian,
India conveniently isolated Nepal as the Ganges Dalit to
be dealt appropriately on the usual one to one tete-a-tete
basis. The second, a far more important joint statement, is
‘Prime Minister Hasina requested Prime Minister Modi
for facilitation of cross-border power sector
cooperation with Nepal.’ Prime Minister Hasina,
using the 2014 SAARC Framework Agreement
for Energy Cooperation (Electricity) instrument,
raised the ‘cross-border facilitation’ cooperation between
Bangladesh and Nepal. India’s Prime Minister Narendra
Modi was, however, ominously silent in the joint
statement. This silence was potent as the Bangladeshi
State Minister for Power and Energy, Nasrul Hamid, was
quoted9 only in January 2017 as having said “We have
received Indian consent to import power from
Nepal. Now Bangladesh will sign a deal with Nepal to
set up a power plant by investing there.”
This does not, of course, mean that Nepal should also
remain in deathly silence on “cross-border facilitation”
cooperation with Bangladesh. Nepal has every right
to question the very purpose of Indo-Nepal Power
Trade Agreement and the SAARC Framework
Agreement for Energy Cooperation (Electricity).
Are they framed to be mere decorative ornaments for
display to the international community as and when
required? These two agreements, if implemented in good
faith and trust, could have far reaching implications in
improving the quality of life of the teeming population of
this region mired in deep poverty. Subsequent to Prime
Minister Hasina’s April 2017 visit to India, Nepal’s two
Prime Ministers, Sher Bahadur Deuba and Khadga
Prasad Sharma Oli, also made their ritual State Visits
to India in August 2017 and April 2018 respectively.
Intriguingly, however, Nepal’s extremely important
“facilitation of cross-border” cooperation with
Bangladesh failed to appear in the joint statements of not
only SB Deuba but also the all-powerful KP Sharma Oli.
This access to electricity trade with Bangladesh would
have provided Nepal the opportunity to sell her surplus
Wet Season energy to Bangladesh and not rely solely on
the mercy of India. Even the Energy Swap/Banking, the
Nepalese media highlighted just prior to Prime Minister
KP Sharma Oli’s visit to India, failed to register in the
two Prime Ministers’ Joint Statement. India’s policy
to maintain her historical strangle-hold on landlocked
Nepal has been manifested by the three10 economic
blockades of 1970, 1989 and 2015. So far-sighted is
India that her blockade policy on Nepal extended even to
electricity transit facilities.
United Nations’s Almaty/Kazakhstan
Conference on Land Locked Countries in 2003
– Electricity Transmission Lines as Transit
Facility
On India’s acute allergy to provide Nepal access to
electricity trade with Bangladesh, it is best to quote11
Surya Nath Upadhyay, former Water Resources
Secretary, who in turn quotes12 Murari Raj Sharma,
former Foreign Secretary:
“….the effort to include the electricity transmission
line as transit facility needed to be picked up
from where it was left at the end of the Almaty
conference on Land Locked Countries 2003. During my
ambassadorship in New York, we had made a proposal
to that effect and thrown in oil pipe lines to make the
proposal palatable to transit countries. As we were
preparing for the conference, transit countries resisted
the proposal until the conference started. Finally, they
agreed to include pipe lines and not the electricity
lines. After intensive lobbying accompanied by threats
to drop pipelines also from the final agreement, most
transit countries relented on power lines.
However, India held out, insisting that there
should be bilateral agreement before bringing
the issue to a multilateral forum. So, it became
a sort of India-Nepal issue. On the last night of
the Almaty meet, I had left [for] my room tired when
Purushottam Ojha (Secretary of the Ministry of Trade
and Supplies of the Government of Nepal participating
in the conference along with the writer) came running
to my room. He was frightened. He told me that an
Indian delegate from the capital pulled him aside and
threatened unpleasant consequences if Nepal
kept insisting on power lines. I asked Kathmandu
Foreign Secretary and sought the directions from the
Prime Minister Surya Bahadur Thapa. The
instructions were predictable. I went down to
the negotiating room, obtained a pledge from the
Indian delegate to take up the issue of power lines
bilaterally and drop them from the final draft of
the Almaty outcome.”
Secretary Murari Raj Sharma’s comment that Prime
Minister Surya Bahadur Thapa’s “instructions were
predictable” is very illuminating. This capitulation to
India on “electricity transmission line as transit facility’
at the 2003 Almaty UN Conference was “the mother of
all blunders” for Nepal. This explains Prime Minister
Modi’s ominous silence to Prime Minister Hasina’s
April 2017 request for “facilitation of cross-border
power sector cooperation with Nepal.’
Conclusion
To conclude, is Energy Banking the most suitable
instrument for Nepal to trade her surplus wet season
energy with India’s dry season energy? Will India agree
to trade the wet/dry season energy on “equal13 volumes”
as envisioned by Nepal’s Energy Ministry? What will
happen to such a Banking mechanism when Nepal will
have excess energy in the dry season also? Analysts
HYDRO NEPAL | ISSUE NO. 23 | JULY 2018
believe that, with over 2,000 MW of hydropower projects
under construction14, such a surplus energy scenario
will emerge in the next 3 to 5 years. Isn’t it, therefore,
better for Nepal to press for access to Indian markets as
offered by the 2014 bilateral Indo-Nepal Power Trade
Agreement? Then there is also the regional 2014 SAARC
Framework for Electricity Trade entitling SAARC
Member States non-discriminatory access to engage in
cross-border electricity trading. As Bangladesh is keen
to trade electricity with Nepal, shouldn’t Nepal grab this
opportunity and hit the iron while hot? Unfortunately,
the Energy Ministry, as usual, opted for the path of least
resistance, that of Energy Banking. By choosing that
path, the Ministry bypassed the two available bilateral
and regional instruments that would have ‘Open
Sesame’-d the doors to vast opportunities for Nepal’s
growing hydropower capabilities.
--
S.B. Pun is Former Managing Director of Nepal
Electricity Authority and in his later years served as an
Officer on Special Duty at Ministry of Water Resources,
Government of Nepal. He writes on energy and water
issues.
Corresponding E-mail: santapun@ntc.net.np
Footnotes
1. Further to this June 2018 article, Kathmandu Post
Money July 8, 2018 (Asar 24, 2075) under the
headline Nepal India Mull Power Banking
reported NEA and India's Central Electricity
Authority (CEA) held a separate meeting to
establish Power Banking deal. Furthermore, NEA's
Managing Director, Kulman Ghising, who led the
Nepalese delegation for the Twelfth Power Exchange
Committee meeting at New Delhi on 5-6 July 2018,
added "India is positive to establish such a deal.
They will send the modalities adopted by various
Indian agencies that are doing energy banking at
their State-levels." This apparently means Power
Banking concept did not originate in Nepal and
India was dissatisfied with NEA's concept note
provided to the Indian Embassy prior to the NEA/
CEA meeting at New Delhi.
2. Kathmandu Post Money, April 1, 2018 (Chaitra 18,
2074)
3. Kathmandu Post Money, April 13, 2018 (Chaitra 30,
2074)
4. India’s December 2016 Guidelines provide
preferential treatment to Indian entities wishing
to export power from Nepal to India. While Indian
entities with 51% or more ownership require a one-
time approval, all other participating entities are
eligible to participate on ‘case to case basis.’ Many
interpret this Guideline as being targeted principally
towards the growing Chinese investment in Nepal’s
hydropower.
5. India’s average Spot Power Price in 2018 IRs 3.43/
kWh, a leap from IRs 2.50/kWh of past two years;
monthly Peak Power Prices in 2018 averaged IRs
7.10/kWh, twice the levels in 2017; 2018 March's
average price was IRs 3.97/kWh and analysts
believe this will shoot up further in future due
3
 to “structural and seasonal factors.” – CRISIL
Infrastructure India, S & P Global Company,
Mumbai, April 3, 2018. To be also noted is that
Nepal presently (June 2018) imports Muzaffarpur-
Dhalkebar power @ IRs 3.98/kWh and Kataiya-
Duhbi @ IRs 5.55/kWh at 132 kV voltage level
from India. At the recent Twelfth Indo-Nepal Power
Exchange Committee meeting of 5-6 July 2018 at
New Delhi, India's CEA proposed a 15 to 20 percent
price hike – Kathmandu Post Money July 8, 2018.
Though Kathmandu Post reported ‘NEA Rejects
India's Proposal', Nepal’s only available Option to
oppose price hike is to resort back to Load Shedding
as it imports a heavy 500 MW of Indian power
during the dry season.
6. Kathmandu Post, Money, December 11, 2016. In
fact, Nepal’s media have also reported that though
the Nepalese Commerce Minister initialed the
agreement with his Bangladesh counterpart, Nepal’s
Energy Ministry has, for some reasons, evinced no
interests so far.
7. Joint Statement issued by Ministry of External
Affairs, Government of India, April 8, 2017.
8. During the Farakka negotiations with Bangladesh,
India always maintained the Brahmaputra-Ganga
basin as being one single entity.
9. Kathmandu Post, Money, January 23, 2017. KPost
quoted Bangladeshi newspaper The Financial
Express.
10. In 1970, for terminating the services of Indian Army
Wireless Operators at 17 check-posts on the Nepal-
China border from Olangchungola/Taplejung to
4 HYDRO NEPAL | ISSUE NO. 23 | JULY 2018
Tinkar/Darchula; 1989, for importing Chinese
arms violating India’s sacrosanct 1950 Treaty of
Peace and Friendship signed with the ailing about
to be toppled Rana government and; 2015, for not
amending/delaying Nepal’s Constitution despite
India’s firm urgings through her Foreign Secretary.
11. Surya Nath Upadhyay. International Watercourses
Law and a Perspective on Nepal-India Cooperation.
2012. Ekta Books Distributors Pvt. Ltd. Kathmandu.
12. Murari Raj Sharma, Broaden Markets for Higher
Investment, Republica, Sunday, January 30, 2011.
13. The Energy Ministry itself made the incomprehensible
policy decision on PPA Guidelines by announcing
new electricity purchase rates in January 2017: i)
Per unit purchase rates for i) Reservoir – Dec-
May Rs 12.40, June-Nov Rs 7.10 ii) Peaking ROR
– Dec-May upto 6 hours Rs 10.55, non-peaking Rs
8.40 iii) ROR over 100 Mw – June-Nov Rs 4.80,
mid-Dec to mid-April Rs 8.40 and mid-April to
mid-Dec Rs 4.80 Kathmandu Post, January 10,
2017. This decision was diplomatically objected by
IFC: IFC urges government to revise provisions
in PPA Guidelines.’ Kathmandu Post January
29, 2017. It was also reported that power purchase
negotiations between NEA and China’s Three
Gorges on the 750 MW West Seti storage project
failed because the Energy Ministry refused to back
down from its PPA Guidelines. NEA recently signed
the PPA with its subsidiary, Tanahu Hydro Project,
for the 140 MW storage project at rates as laid down
by the Ministry’s PPA Guidelines – Kathmandu
Post June 30, 2018.
14. NEA’s Annual Report of August 2017 (Bhadra
2074). NEA has already concluded PPAs with
another 910 MW of hydropower projects that are
awaiting Financial Closure.